More Disruptive Technology Start-Ups, Please

July 29, 2010

Last weekend I got to meet several start-ups from Yale and learned more about the Yale Entrepreneurial Institute (YEI). Although Yale's start-up ecosystem is decades behind those of Stanford and MIT, I'm sure Yale will graduate several entrepreneurs of note.

Columbia and NYU also have major efforts underway to foster entrepreneurship as a respectable and obtainable profession. Last year more Columbia MBAs said they wanted to peruse a career in entrepreneurship than wanted to pursue a career on Wall Street!

The Yale event was a microcosm of why Americans should continue to be optimistic about entrepreneurship. Our risk-taking culture, critical mass of self-made-entrepreneurs, and acceptance of failure virtually guarantee a steady stream of innovation. Although many young companies will fail, others will go on to improve the world while simultaneously creating thousands of new jobs.

Unfortunately, the innovation coming out of Yale and all other universities is threatened by the current state of the American IPO. Mid-stage funding is critical to both timely returns for early stage risk capital and, more importantly, scaling innovative businesses. As I have said before, we are seriously lacking “Ten Million Dollar IPOs.” Tech IPO's will move offshore if America does not remedy its mid-stage capital markets.

With expensive accounting rules, an increased threat of litigation and hundreds of millions of dollars in fines for some firms, the once prestigious New York Stock Exchange and other American markets have become unattractive to companies. Daimler and Deutsche Telekom have fled this year and the few remaining are likely to follow.

It looks as if American Entrepreneurs, Angels and VCs need to start familiarizing themselves with the “non-NASDAQ” IPO process in order to scales and remain competitive. Some already have. This week Sequoia-backed SKS Microfinance will raise over $350,000,000 in an IPO on the National Stock Exchange of India and the Bombay Stock Exchange.

A changing of the Guard - This is not the 80s or 90s

Recently, New York has passed Boston as the number two city on the planet for creating and launching technology start-ups (both take a back seat to Silicon Valley). But New York could be losing its dominance in facilitating mid-stage capital.In the 80s and 90s, technology companies from all over the world turned to New York and US investors to fund their mid stage growth. Wouldn't it be ironic if future US entrepreneurs turned their back on Wall Street to fund their mid-stage capital needs?

A decade ago, tech IPOs ruled the stock markets and Silicon Valley. They were the end-all and be-all for ambitious entrepreneurs and venture capitalists looking to become instant billionaires, or at least millionaires. That was many booms and busts ago. The IPO market never came back, and the multiple financial meltdowns which brought on Sarbanes-Oxley and other regulations made going public even less appealing to shoot-from-the-hip entrepreneurs. The founders of the most successful tech companies today—Facebook, Skype, LinkedIn—are pushing off the inevitable IPO for as long as possible. And for smaller tech companies, IPOs seem hardly worth the bother.

AT&T, Disney, General Electric, Genentech, Cisco, Intel, Microsoft, Google and E-bay all had a public offering. Since going public, they have all benefited from the credibility, profile and prestige associated with being publicly traded companies. And of course the access to capital, both as IPOs, and perhaps even more importantly, with secondary offerings. The ability to do a short lead time secondary offering gives a company enormous flexibility.

But that flexibility is unavailable to most growth companies today.

Would the phone, talking movie, television, personal computer, and internet industry have been as innovative if these leading companies were instead acquired as a division of Western Union? I think not, but that is the future of most venture-backed companies today. M&A has become the only available exit for growth investors and Founders.

But why? Erick, as well as some of the people he quotes like Fred Wilson and Frank Quattrone, point to one or two barriers to going public - mostly the lack of "category-defining, earthshaking" precedents, and regulatory hurdles (such as Sarbanes-Oxley). But I think that's just the tip of the iceberg.

As I posted before, there are at least nine major impediments preventing tech IPO's:

Quattrone's conclusion is right - VC's need an IPO market. But I think he's wrong if he thinks the problem will be solved just by a few high profile IPO's from some current web standard bearers.

Our community needs to address ALL the key impediments for tech IPOs. Something must change, even if it means moving the IPO market off-shore and and excluding U.S. participation to under 500 U.S. “Qualified” Investors.

There are smart people in Silicon Valley, London, New York and Hong Kong working on ways to overhaul the IPO process. As tech innovation moves millions more into the middle class, people need a better place to invest their new wealth. And by 2035 the majority of the world’s wealth is expected to be outside the G20. It's inevitable that markets will connect these investors with start-ups and innovation will continue, that's a given.

But the big question -- how long it will take U.S. entrepreneurs and investors to figure this out?

April 22, 2010

For 30 years, the process of job creation in the U.S. was the envy of the world. Start-up entrepreneurs backed by private investors, followed by public investors, created and expanded companies that generated millions of jobs, all while growing the U.S tax base. These new companies became the backbone of our modern economy.

While Ford, International Harvester, Chrysler, PanAm and RCA shrank or declared bankruptcy, Adobe, Dell, Microsoft, Cisco, Intuit, Yahoo, and hundreds of others were created jobs, increased our standard of living, and made America a better place.

Today that process is under siege: .not only from abroad where nations are duplicating our process, but also domestically, as well-meaning legislators are undermining the process. We can handle the international competition, but these internal assaults could be the death of America’s standard of living.

Step 3 – The company moves into the public market, where it has even greater credibility and access to capital, enabling it to continue to create jobs.

This whole process costs the government nothing, while it simultaneously increases the U.S. tax base. But it’s about to come to an end if elements of Senator Dodd’s new Banking Bill are passed into law. Specifically, the Dodd Bill makes it much harder for individuals to qualify as angel investors. It’s already competitive enough for startups to attract early investment.

If these changes are implemented, the definition of “accredited investor” will be individuals with a net worth of over 2.3 million. Currently that minimum is 1 million. As a serial entrepreneur and early stage investor, I know firsthand what this means to the future of startups. If these changes are implemented there will be significant reduction in the number of startups that are able to attract funding.

Other countries have no such artificial barriers. In China, where for the first time, in 2009, more money was raised in IPOs than in the U.S, anyone can have a chance of getting rich and investing in risky startups. I guess our government thinks you can’t handle the risk associated with early stage companies, unless you are already rich. Why is it only the rich should have access to this exceptional asset class? True 60% of startups will produce no economic return for investors, but in aggregate the asset class is outstanding.

Section 412 of the draft bill recommends adjusting the accredited investor to for an individual to $2.3 million in net worth or $450,000 plus in annual income. At a time when many accredited investors have lost approximately 20% of their net worth and innovative startups are having an increasingly difficult time raising equity capital, decreasing the potential pool of angel investors is counterproductive to supporting the very companies that will create new high paying jobs.

Section 926 of the bill would require, for the first time, companies seeking angel investment to make a filing with the Securities and Exchange Commission, which would have 120 days to review it. This would both raise the cost of seeking angels and delay the ability of companies to benefit from their funding. 120 days is an eternity for a fast growing start-up. Kauffman Foundation Vice President, Robert Litan notes: “that 'protections' for angel investors in Section 926 of the comprehensive financial reform bill outlined by Senate Banking Committee Chairman Senator Dodd are unnecessary and will hurt America's job creators.”

Section 928 of the legislation would repeal the existing federal preemption of state regulation over “accredited investor” securities offerings. This would end the uniform, national set of rules for financing startups. By eliminating regulation that is working well, the draft bill would expose technology startups to a potentially complicated system of patchwork, state by state regulation, resulting in higher costs, more legal risks, and the potential of not being able to raise capital because of different rules in different states. Nothing would be gained from this change: no additional protections would be provided to the accredited angel investors and there would be no benefits to the national financial system or to the economy.

These three Sections of the bill will kill the creation of jobs, especially green jobs.

Right now the CleanTech industry in the U.S is in its infancy. Many of the companies of the future are currently angel backed and all rely on investment for their early stages of growth.

These companies produce no drain on the U.S. treasury, and in fact increase the tax base by growing the economy.

A good example is Locus Energy, With Angle backing; Locus is developing the hardware and software to manage alternate energy sources like solar panels.

Another good example is high quality carbon offset provider, Belgrave Trust. With Angel backing, Belgrave Trust helps high-net-worth individuals (and some corporations) use market based solutions to completely offset their carbon footprint.

Both companies are growing their revenue, delighting their customers, and both companies are creating an ongoing stream of high quality green jobs.

Our future is dependent on entrepreneurs and angel investors, for they will create the jobs of the future. I just hope well intentioned legislators destroy the process.

October 23, 2008

I like to have a detailed business plan in place before committing serious resources to a new venture… I figure it is a lot better to catch mistakes on paper, as opposed to discovering them once cash and careers are on the line.

A business plan should not be viewed simply as a funding document. Even if you don’t expect to have outside investors, it is a great way to solicit feedback from people you respect and trust. Writing a plan is hard work, but it makes execution easier. I am surprised how many start-ups don’t invest the time to write down their plan, yet still expect an outside investment.

Why should an investor risk their cash if the entrepreneur is not willing to think through her idea?

Over the last few years, I have witnessed an increase in the number of entrepreneurs who expect to raise funds with nothing more than a prototype and a PowerPoint. The general consensus in Silicon Valley is that funding is about to be a lot harder to come by. I hope that one of the upsides of the nuclear winter is startups that are more thoroughly thought out.

There will always be capital available for good management teams with well thought-out plans… Perhaps the ability to think through an idea is the mark of a good management team?

Of course, planning is no substitute for actual selling. For pitching, Prototypes and PowerPoint reign supreme.

April 24, 2007

There is a great post at GenuineVC, by David Beisel, talking about Growing Up from Tribal Mode into an Organization. David clearly articulated an important transition that all rapidly growing companies struggle with, the transition for the “tribal” best athlete mode to the “hierarchal” specialization mode. This process can be hard on founders, as they need to change their management style. The transition can be even harder for the team because it no longer will have as much direct access to the founder and will have reduced involvement in many aspects business. Not all team members, founders included are able to make this transition. My guess is this transition usually occurs somewhere around 50 employees. My quick, unscientific, poll of VCs and entrepreneurs, suggests the transition needs to happens somewhere between 40 and 80 employees.

The transition from Tribal Mode into an Organization mode can best be summarized as: In tribal mode you are valued by your ability to solve the start-ups most pressing issues; in organizational mode you take ownership of issues, and should not be distracted by other efforts outside your “area”.

David’s observations are spot on, but I think there is another important transition that is often missed by many Entrepreneurs, VCs and veteran big company managers. The difference between Project Management vs. Organizational Management.

As a former Management Consultant, I witnessed the difference between project management and organizational management. As serial-entrepreneur, I believe that in the hectic early stages of a start-up project management is more critical than organizational management. Why; because a well planed start-up changes quickly, like the roles in a well executed project plan. The structure and tasks in project differs as it moves to completion, just as the structure of a start-up needs to change as the business gets closer to launch.

It is important to consider; just because someone successfully ran a 500 person organization, it does not mean they are any good at project management.

To contrast the difference between project management vs. organizational management, I pulled documents on each topic and ran it through a linguistic tagger. Notice the difference in the concepts that emerge:

Tagged Concepts for Project Management:

activities

budget

constraints

development

documents

management

methodology

objectives

planning

process

product

project

resources

risk

scope

stakeholders

tasks

techniques

time

tools

variables

Tagged Concepts for Organizational Management:

administration

business

control

functions

group

levels

management

managerial

motivating

objectives

operations

organization / organizations

people

planning

resources

studies

theoretical / theories

Both types of management are critical. But have no illusion, they are very different. Project Management is goal driven and geared to completion of objectives. Results tend to be binary – either the objectives were met or the team failed. Reduction of risk is paramount, distractions are not tolerated (think revolutionary results). Project Management is great for one time projects like commercializing a revolutionary technology in the shortest time possible.

Organizational Management is much more about ongoing optimization and predictable outcomes. Think continuous improvement, ongoing operations and repeatable tasks. (The results tend to be evolutionary). Organizational Management is critical if you want to offer constantly high quality service.

So what is the key take away? - Entrepreneurs and Boards need to realize when they are transitioning from Tribal Mode to Organizational Mode...but that is not enough, they also need to consider whether they are managing a project or has the business matured enough that it should be managed as an Organization. Transition too soon and you can be bogged down with bureaucracy, Transition too late and your costs and quality will get out of control.

January 03, 2007

General Henry M. Robert was a genius! His 1876 classic “Roberts rules of order” was an essential guide to conducting fair, orderly and productive meetings. Parliamentarians everywhere appreciate his contribution to democracy and to the advancement of mankind. Healthy debate, efficient use of time, and better decisions resulted from his efforts.

For all General Roberts genius he failed to take into account the Internet.

Will someone, preferably someone with the name of Robert, please update his rules for the wired environment? (Think of it as a GNU for governance).

In Robert’s day, everyone met in person, either in a larger meeting or in a sub-committee. The tyranny of distance required a parliament be a representative body. Only the chosen “experts” could contribute… in effect there was no way to leverage the full wisdom of crowds.

Wired rules of order should leverage the wisdom of crowds.

There must be some way to leverage the crowd to support the debate. Perhaps online fact checkers could support the speaker? Maybe remote and part-time experts could be “dialed in”, in real-time, when needed. Are their elements of parliamentary procedure could be opened to a wider audience?

And what about multitasking! In Robert’s day you could speak or listen or vote. There was no online chat, internet searches, e-mail, SMS or real-time polling. Surely if modern 12-year-olds can simultaneously chat online, do homework and watch TV there must be a way for legislative body to use technology to consume more information as part of their debate process.

Wired rules of order should use multitasking and technology to get more information into the decision-making process.

And what about time? In Robert’s day most processes were serial, debate was often tabled (put on hold) to be addressed at another time. But come on! We live in a 24-hour global economy. If technology can expand the wisdom that can be brought to bear there must also be a way to use technology to parallelize more of the debate. Can not some of the discussion can be handled completely online without the constraints of physical space, and other debates can be spun off to other geographic physical locations is there not an opportunity to speed up analysis? Although slow legislative process has some advantages there must be situations where speed is an asset.

When appropriate a wired rules of order would leverage technology to “keep the debate going” to arrive at more timely decisions.

What about physical attendance? In Robert’s day in-person attendance was a must, but today sometimes videoconferencing, teleconferencing, skype, e-mail and instant messaging are powerful options.

Wired rules of order would define procedures to take advantage of multiple asynchronous and synchronous communication media.

Robert defined who gets the podium, but in a wired world who gets the big screen? Who can see all the proceedings? Who can download the podcast? Who can listen real-time? Who can post non-binding comments to the parliamentary blog? What aspects (if any) of parliamentary procedures be reserved exclusively for in-person attendees?

I don’t know the answer. I wish General Robert was here to help. Clubs, Governmental Organizations, Charities and Secrete Societies everywhere need him back!

Come on tech-savvy-master-debaters, show some leadership. I have given you the vision, now “all” you need to do is work out all those pesky details (yes that’s sarcasm).

Someone must be up to the challenge. Please make this 2007 wish come true and give the world a wired version of Robert’s rules of order.